Image credits: Greg Rosenke on Unsplash
/
Analysis

Mexico: Hub for International Energy Activity

By Cas Biekmann | Wed, 10/27/2021 - 16:59

Now that private energy development is slowing, location is everything for new investors. Despite challenges in the local market, industry leaders see Mexico as a strategic base for globally-minded business too.

 

“Since we started, our factories have increased their capacity every six months. We started manufacturing blades in June 2019, since then, we have increased our production significantly. The biggest factor making this possible has been US demand. This demand was already sizeable, but with the new administration we are expecting a further increase,” Country Manager Mexico of wind turbine producer Nordex, Albert Sunyer, told MBN.  “Although we are concerned about lower demand in Mexico we expect US demand to maintain our facilities in full production. The US market is pushing forward strongly and this demand can be met by our facility in Matamoros, Tamaulipas.”

As the world’s 15th biggest economy, according to EY, Mexico’s credentials as a manufacturer and exporter are well-established. The country’s productive industries take an important place here, as well. The country has free trade agreements with 46 countries, of which the most significant is the USMCA. Its access to North and South America, Europe and Asia presents a major opportunity for public and private companies in the energy sector. Yet what is at times not highlighted enough is how Mexico can be an excellent headquarter when it comes to building knowledge, financial capabilities, producing commodities and manufacturing energy-related equipment.

In the manufacturing environment, several companies have set up their base in Mexico. The country’s large population of roughly 130 million is increasingly active in the economy as more young people continue to join the workforce, according to EY. 17 percent of Mexican jobs are found in various manufacturing industries. Wage costs are significantly cheaper than in Canada or the US. Moreover, Mexicans are increasingly well-studied: Mexico ranks eighth in the world when it comes to the number of engineers ready to work. Boosted by USMCA, these benefits begin to yield strategic advantages.

Players in the solar energy sector eye similar opportunities. In December 2020, Solarever’s President Simon Zhao told MBN why he thought Mexico was such an attractive location to manufacture, other than its good engineers and low labor costs. The company recently opened a new plant near the port of Manzanillo, which allows the company to export to the entire continent. “First of all, Mexico’s proximity to the US offers a unique opportunity, especially now that Joe Biden has been elected president. He will support the solar industry a lot more than his predecessor. As a result, Solarever expects to increase its exports to the US,” began Zhao, adding to a chorus of business executives that point toward Joe Biden’s clean energy-positive policy approach as a major driver for the industry.

But there are other factors at play as well. Many producers of photovoltaic solar panels in the top ranks of the bankability-focused BNEF Tier-1 list are from China. “The US imposes heavy antidumping duties on China, meaning that solar panel manufacturers are looking to produce elsewhere to avoid these restrictions. Some manufacturers are considering countries like Vietnam and Thailand but I believe Mexico is a great option. Therefore, we decided to invest in two manufacturing plants in the country next to our existing one,” Zhao said, adding that the government’s push for a higher amount of Mexican-made content provides further opportunity. While China’s solar credentials are difficult to challenge, solar’s globally growing demand might well spur further growth within Mexico.

The Mexican market has also proven to be a good starting point to build a financial platform, as was the case with Cox Energy’s landmark listing on the country’s stock market. “Last year, despite the pandemic, we were the only equity IPO on the BIVA stock exchange. We listed 15 percent of the company, which was a breakthrough for us and sets the stage for exponential growth. For us, going public, in addition to opening new capital financing alternatives, has been vital to accelerate our entire institutionalization process. The IPO was a wise decision for Cox Energy America,” said Enrique González, Executive Vice President of Investor Relations and Communications at Cox Energy America, in a recent interview.

Another more immaterial benefit is the value that knowledge and experience bring. For many technology companies looking to expand to Latin America, Mexico is an ideal first location to adapt solutions to the Latin American market. “In Mexico, we can diversify various areas of our business and bring this diversification to other countries in the continent,” said Albeiro Guayara, Country Manager Mexico of OCA Global. Mexico’s private energy industry is facing challenging times under the current government’s policy direction, though this can also have a positive effect in forcing companies to bring their best. “In the short term, we believe that Mexico can export the knowledge it has already gained in this area and will continue with its leading status in the renewable energy industry,” said Rafael Sanchez, the company’s Division Manager.

The natural gas industry should not be forgotten, either. Mexico used to be a gas-producing powerhouse. Nowadays, it opts to import most of its supply as dry natural gas from the US, simply because of the economics behind it. This is a missed opportunity, said Warren Levy, CEO of Jaguar Exploration & Production, at MEF 2021 ECHO: “The real problem is not just the billions of dollars, it is the trickle-down effect that the local supply chain could take advantage of, which would effectively multiply this value.” Mexico could benefit from exporting surplus natural gas, too. By liquefying natural gas (LNG), it can be transported over long distances and brought to markets where gas prices are skyrocketing. “The US LNG export capacity ceiling is likely the only thing reining in Henry Hub prices from following European and Asian gas and LNG prices to the moon," said Sheetal Nasta, Managing Editor at RBN Energy to Reuters. Several Mexican companies have identified this opportunity and are looking to make it a reality.

In a further prospective opportunity, the elysian fields of green hydrogen production could well be constructed within Mexican borders. “Mexico would be able to produce green hydrogen at 65 percent of the cost, roughly US$1.4 per kilogram compared to US$2.3 in other countries, a rather stark difference,” said Israel Hurtado, President of the Mexican Hydrogen Association (AMH), pointing toward a report from McKinsey.

Cas Biekmann Cas Biekmann Journalist and Industry Analyst